Forecasters change tune — for better

Cushman now says it expects Manhattan office rents to reach record levels by 2014

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The healthy appetite from large tenants for big blocks of space seen in 2010 continued last month, with Hong Kong-based apparel company Li & Fung taking nearly 500,000 square feet in the Empire State Building, amid reports that Nomura Holding America might lease about 600,000 square feet at Worldwide Plaza.

The increase in activity, especially in Midtown and Midtown South, has driven asking rents and net effective rents up. It’s also led forecasters to reassess their projections and predict record rental levels in the coming years.

But despite that improvement, Downtown still remains a drag on the Manhattan office market, as it has for the past year, brokers said. Leasing volume there significantly trailed other Manhattan markets in 2010.

The largest closed deal last month was the Li & Fung deal. The company, which signed a lease for 490,000 square feet at the Empire State Building after months of negotiations, was represented by broker Mitchell Konsker, who — along with four others at Cushman & Wakefield — departed last month to join expanding rival Jones Lang LaSalle. Empire State Building owner W & H Properties was represented by William Cohen of Newmark Knight Frank.

Meanwhile, Tokyo-based financial firm Nomura, represented by John Cefaly, vice chairman at Cushman, was eyeing more than 600,000 square feet at Worldwide Plaza, at 825 Eighth Avenue, Crain’s reported.

The strong activity comes as asking rents in Manhattan are on the rise. They increased in December to $48.32 per square foot, up 1.5 percent from the low in July of $47.57 per square foot, according to commercial firm CB Richard Ellis.

But asking rents are just part of the story. Net effective rents — what the space actually costs the tenant — have risen sharply in recent months as landlords cut back on free rent and build-out contributions. Manhattan net effective rents rose to $46.33 per square foot in the fourth quarter, up 14 percent from the market’s recent trough of $40.54 per square foot in the first quarter of last year, according to Cushman figures.

Joshua Kurloff, a vice chairman at Cushman, said net effective rents rise faster first, and then asking rents follow, as landlords pull back their concessions.

“I would call net effective rents a leading indicator that we are moving into a transformational change in the office market going forward,” he said.

The market improvement led Cushman’s research department to raise its forecast for rents in Midtown Class A office buildings substantially. In January 2009, the brokerage predicted that Class A asking rents in Midtown would be $80.27 per foot by the end of 2014. But last month the company revised that number upward by 12 percent. It now says it expects asking rents to reach record levels in 2014 of $90.24 per square foot — besting even the peak of the market in 2008, when they reached $86.40 per foot.

“We are advising our tenants that, if possible, [they] should try to execute today — over the next 12 months,” to avoid a potential spike in rents, Kurloff said.


Gary Barnett’s Extell Development Company is branching out with a new satellite office. The company signed a lease last month for 3,930 square feet of space only a few hundred feet west of its under-construction tower, Carnegie 57.

The third-floor space will serve as a field office for the 74-story Costas Kondylis-designed condo and hotel at 157 West 57th Street. Extell is scheduled to move into the space, which is in the Feil Organization’s building at 200 West 57th Street, in early February. The lease runs through the end of 2015, Kevin Driscoll, director of leasing for the landlord, said.

Extell’s main offices are on the seventh floor of 805 Third Avenue, between 49th and 50th streets.

The development firm is paying $45 per square foot but got three months free rent and $30,000 in construction expenses thrown in, Driscoll said.

Average asking rents in Midtown were $55.98 per square foot in December, the most recent figures available, up from $55.16 the month earlier, CBRE figures showed.

Overall, the Feil building has seen more activity this year. Taking rents in the building were up about 12 percent to an average of $50 per square foot in the 27 deals done in the building in 2010, compared with 2009, Driscoll said.

In addition, as a reaction to demand for larger users, he’s strategically signing leases on certain floors to expire at about the same time in about three years. That will allow the building to offer entire floors to a single tenant.

“What I am seeing is a trend of tenants who want to be in a full floor,” he said.

Midtown South

The Midtown South market, a magnet for Internet and other creative firms, is leading the city in average asking rent growth. But even with that, some areas such as Hudson Square/Tribeca still have some of the highest availability rates in the city.

The online firm FreeWheel Media, which manages digital video advertising, is moving into 7,000 square feet on the top floor of 235 Park Avenue South at East 19th Street this month, the building’s broker, Gerry Shallo, president of S & P Realty Enterprises, said.

He said a few technology companies toured several spaces in the building, but did not offer enough to land a deal. FreeWheel is paying $36 per square foot, $2 per foot lower than the original ask, he said.

“I think that tech companies are moving to Midtown South. There is for sure more interest in the last six months or year than I have seen previously,” he said.

Michael Mandel — an associate with commercial firm Grubb & Ellis who is representing several tech firms that are hunting for space — said the “tech start-up scene is booming like never before.”

“I track well over 100 tech start-ups that are actively growing and hiring new employees,” he said.

Overall, Midtown South saw its average asking rents rise by $3.11 per square foot, or 8 percent, as of the end of 2010. In fact, it was the only one of the three markets to see an increase year over year. Nonetheless the availability rate for Midtown South was 12.5 percent on the whole, and Hudson Square/Tribeca was the second highest in the city with 17.2 percent, CBRE figures said.

Not all buildings in the Hudson Square area are struggling, though. Last month, American Express Travel Related Services signed a lease for the entire 27,000-square-foot sixth floor at 250 Hudson Street. That was the final piece of vacant office space in the 360,000-square-foot building, said Dennis Brady, executive managing director of leasing for property owner Jack Resnick & Sons.


Downtown is struggling with the highest availability rate in Manhattan and flat rents.

The availability rate there is 13.8 percent. That’s above both Midtown at 12.2 percent and Midtown South at 12.5 percent, and average asking rents in December were $38 per square foot, barely above their low point in January 2010, when they dropped to $37.65 per foot.

But some parts of the district have few available spaces. One is the City Hall submarket, which is one of the tightest in the city. The availability rate there is just 4.9 percent (excluding the 1.1 million-square-foot tower at the former Verizon building at 375 Pearl Street, which CoStar does not list as available), figures from Grubb & Ellis show.

Grubb & Ellis’s Mandel, who is representing a 6,000-square-foot space, comprising the entire third floor of 390 Broadway, said the submarket south of Canal is attractive to creative users and non-office users such as yoga studios or gyms. He said those types of tenants are more interested in leasing spaces like the one he’s representing in the five-story, 30,000-square-foot building, located between Walker and White streets.

He would not speculate on exactly how long it would take to lease the space, which has an asking rent of $28 per square foot.

“The space is pretty much ‘white box.’ I don’t think it will take more than a few months,” he said, and added, “We can be aggressive on the pricing.”